Money and the Rule of Law: Generality and Predictability in Monetary Institutions

Contemporary monetary institutions are flawed due to constrained discretion and information and incentive problems, which make macroeconomic stability systematically unlikely. This volume argues for embedding monetary institutions into a rule of law framework to provide a sturdier foundation for economic growth and prosperity. A rule of law approach would remedy the flaws that resulted in misguided monetary responses to the 2007-8 financial crisis and the COVID-19 pandemic.

Format: Paperback / softback
Length: 256 pages
Publication date: 03 June 2021
Publisher: Cambridge University Press

The current framework of contemporary monetary institutions is fundamentally flawed. The prevailing paradigm in monetary policy advocates for limited discretion as the preferred approach for central banks. However, no matter how skilled or well-intentioned central bankers may be, discretionary policy inherently faces information and incentive challenges that render macroeconomic stability systematically elusive. Moreover, central bank discretion implicitly undermines the fundamental jurisprudential norms of liberal democracy.

Drawing upon a vast array of scholarly research, this volume presents a groundbreaking argument in favor of integrating monetary institutions within a rule of law framework. The authors advocate for overarching, predictable rules to provide a more robust foundation for economic growth and prosperity. A rule of law approach to monetary policy would rectify the shortcomings that led to misguided monetary responses to the 2007-8 financial crisis and the COVID-19 pandemic. Understanding the rationale behind true monetary rules is the initial step toward establishing more stable monetary institutions.

The flaws in contemporary monetary institutions are multifaceted. Firstly, the prevailing paradigm of limited discretion for central banks restricts their ability to respond effectively to economic challenges. Central banks are often constrained by political considerations, budgetary constraints, and the need to maintain market stability, which can limit their flexibility in implementing monetary policy. This can result in delayed or ineffective responses to economic downturns, exacerbating the impact of crises and leading to prolonged economic suffering.

Secondly, discretionary policy contains information and incentive problems that hinder macroeconomic stability. Central banks rely on economic data and forecasts to make decisions about interest rates and other monetary policies. However, these data can be subject to biases, errors, and uncertainty, which can lead to misperceptions and incorrect policy decisions. Additionally, the incentives of central bank officials, such as career advancement and reputation, may not align with the long-term interests of the economy, leading to short-term thinking and policy biases.

Thirdly, central bank discretion implicitly violates the basic principles of liberal democracy. Central banks are often granted significant autonomy and power to regulate the economy, which can raise concerns about the concentration of power and the potential for abuse. Without proper checks and balances, central banks can override democratic processes and make decisions that affect the lives of millions of people without their consent or oversight.

To address these flaws, the volume proposes a novel argument in favor of embedding monetary institutions within a rule of law framework. The authors argue that a rule of law approach would provide a more robust foundation for economic growth and prosperity by promoting transparency, accountability, and predictability. General, predictable rules would ensure that central banks make decisions based on objective criteria, rather than subjective preferences or political considerations.

Furthermore, a rule of law approach to monetary policy would remedy the shortcomings that resulted in misguided monetary responses to the 2007-8 financial crisis and the COVID-19 pandemic. The financial crisis was characterized by a lack of regulation and oversight, which allowed banks and financial institutions to engage in risky behavior and contribute to the global economic meltdown. By implementing a rule of law framework, central banks would be held accountable for their actions and would be required to follow established procedures and guidelines. This would help prevent future crises and ensure that monetary policy decisions are made in the best interests of the economy.

In conclusion, the current framework of contemporary monetary institutions is fundamentally flawed. The prevailing paradigm of limited discretion for central banks restricts their ability to respond effectively to economic challenges, contains information and incentive problems that hinder macroeconomic stability, and implicitly violates the basic principles of liberal democracy. By integrating monetary institutions within a rule of law framework, we can create more stable and resilient monetary institutions that promote economic growth and prosperity while upholding the values of democracy and accountability.

Weight: 312g
Dimension: 151 x 228 x 13 (mm)
ISBN-13: 9781108790840